Cutting access to InTrade violates Americans' speech rights

Both Nate Silver, above, who produces the 538 blog for the New York Times, and InTrade.com, based in the U.K., issued highly accurate election predictions.

Can the power of markets help us predict the balance of power? Yes - if the federal government does not forbid it.

Just as people wanted to know where Hurricane Sandy would hit, or how flu vaccines should be allocated, millions craved accurate forecasts of the 2012 elections. By analyzing thousands of polls, big data supercrunchers like Nate Silver accurately predicted the outcome of almost every political race. InTrade.com, a prediction market based in the United Kingdom, likewise accurately called the presidential vote in all but one state. Whereas Silver won accolades, however, the U.S. Commodity Futures Trading Commission has demanded that Americans stop using InTrade.

InTrade allows people to purchase contracts that pay upon the occurrence of some future event. Long-shot contracts with events that are rare sell at a discount. Easy or obvious calls sell at very close to their payoff amount. InTrade works because it offers people monetary incentives, ensuring that accuracy pays. Markets like InTrade tap the wisdom of the crowd, and draw on a wide range of experts. Unless, of course, the CFTC has its way.

Instead of embracing this new technology, which provides insights into how the public views important issues, the CFTC wants to ban it. The CFTC claims that allowing people to predict a presidential election, whether or not the unemployment rate will fall, or whether North Korea will start a war, all constitute commodities trading. And when the CFTC sees commodity futures trading, it rolls out enforcement actions and bans.

The government's aggressive federal lawsuit, empowered by the Dodd-Frank Act, asks a court to close all of Intrade's markets - and not just those limited to commodity predictions. This argument is bad policy, and ignores the First Amendment - indeed, the CFTC's complaint makes no reference to the Constitution at all. This suit is an overreaching federal enforcement that shuts down a vital collection of information about what people think, and unduly chills speech.

Prediction markets are protected by the First Amendment in two important respects: Individual predictions are protected speech, and the prediction markets create a virtual "marketplace of ideas."

First, making predictions on markets allows individuals to express their opinions on core political concerns, such as the outcome of elections or how the United States will handle foreign policy decisions.

The fact that people pay to make predictions is irrelevant for purposes of the First Amendment. During the last election, millions of Americans spent money to voice their opinions on political races.

Speaking about a candidate - lawful activity at the core of protected political speech - cannot be illegal simply because the money has been spent online, rather than in a print newspaper or on a television advertisement. And unlike gambling, where a person places a wager based on the outcome of a sporting event, or the spin of a roulette wheel, predictions about important political and societal events reside at the heart of our representative republic.

Predicting the outcome of the election is conceptually different from speculating about the future prices of commodities such as metal or crops. We have no qualms with regulation of these commercial markets. However, the CFTC's position, consistent with its previous policy statements, is not limited to the prices of commodities, but broadly aims to shut down all prediction markets that use monetary incentives. This shotgun litigation approach runs afoul of the First Amendment's overbreadth doctrine.

Second, predictions markets are the virtual embodiment of what Justice Oliver Wendell Holmes referred to as "the marketplace of ideas." Rather than writing millions of letters to the editors of newspapers, or shouting from countless soapboxes, today Americans voice their opinions on the most pressing issues of our time online. Predictions markets are clearinghouses for these views, and serve the essential function of aggregating and distilling these ideas for the public to learn. The results of the market, which are collections of the speech of thousands of Americans, are themselves protected speech, entitled to strict scrutiny under the First Amendment.

If allowed to cut off Americans' access to InTrade, the CFTC will effectively censor the modern-day equivalent of a jointly authored political pamphlet - think of it as a crowd-sourced descendant of The Federalist Papers. It doesn't take a prediction market to see where that policy will lead. In this instance, free speech cannot survive without free markets.

Blackman is an assistant professor at the South Texas College of Law and the creator of FantasySCOTUS.net, a Supreme Court fantasy league and prediction market; Cherry is a professor of law at the Saint Louis University School of Law; and Bell is a professor of law at the Chapman University School of Law.